Trading Strategies

Creating a strategy for success entails study & preparation

Trading incurs a high level of risk and can result in the loss of all your capital.

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Different Types of Investment Strategies

The dictionary defines a strategy as a set of activities planned or formulated with the aim of achieving a pre-defined overall aim. It also defines ‘investment’ as the allocation of assets (usually money) in the expectation of gaining a benefit (usually profit) in return.

Hence, an investment strategy is a planned set of activities that involve setting money aside (step 1) in hopes of making a profit (penultimate step). In between the preamble and the postscript will be several intermediate steps, one of which entails the ‘where’, which will usually focus on an investment or trading account with a broker. The ‘how’ is a bit more complicated.

Here we come up against a whole slough of investment (usually long-term) and trading (usually short-term) strategies, in themselves a subset of actions at the end of each one, where we intend to show a profit.

All trading strategies include 3 principal essentials: WHEN to OPEN a trade, when to CLOSE it and how to MANAGE it – the latter usually referring to money management, i.e. how much to allocate. This is not only important in regards to maintaining a healthy life span for your account; it is also paramount to preventing a stopout: invest too much and leverage it too much, your used margin could grow exponentially without your being aware.

Short-term stock trading strategies

The following trading strategies apply primarily to day traders, since they are shorter in term.

Day Trading Strategy

Day trading is usually considered a style rather than a strategy. It involves closing all open trades by the end of the trading day so as to avoid overnight swaps and gaps. Often, though, this entails a specific strategy that involves opening a position, when an asset crosses its (usually) 8-period moving average and placing stop-loss and take-profit orders at equal distances from the entry point

Position Trading

Position traders rely on technical analysis, fundamental analysis or a combination thereof, paired with general market trends and historical patterns. This is usually a comparatively long-term strategy.

Forex Scalping Strategy

Scalping is the day trader’s favourite strategy. It involves opening and closing extremely short-termed positions the moment they become profitable. Key levels (support, resistance, the width of a channel, etc.) are identified and the asset traded in between these. Scalping usually involves major currency pairs, since these entail higher liquidity, and their trends are therefore stronger and more decided. Also, due to the rapid-fire character of scalping, traders will often automate their activities, especially using expert advisers to open positions and – by setting SL/TP orders – close them.

Swing Trading

Swing trading is actually not considered a day-trading strategy; in fact, it is far from being a short-term undertaking. Swing traders will usually host positions lasting from several days to months, though not as long as a Buy & Hold trade, which could last for years. Strategically, it is similar to range and trend-trading; however, the trader will seek specific ‘swing’ points that indicate a reversal (between action and retracement and vice versa) within the general trend.

Complex Strategies

The Channel Strategy

Once a channel has been identified, we wait for a breakout in the case of the attached up-trend, that would be the 2nd bear candle. As soon as that candle is complete, enter at half its height placing a SL above it at the same distance.

Breakout Trading

Breakout trading, like trading a channel, is contingent in first identifying the general trend, its support and resistance levels, most importantly of all. After, the breakout must be confirmed, often by accompanying fundamental data and/or increasing volumes that solidify the new trend.

The Bullish/Bearish Crossover

Both of these strategies refer to a crossover on the MACD, whereby the MACD crosses above or below the ‘0’ line, indicating the beginning of a – respectively – bullish or bearish market. The end of the trend will usually be signified the moment the MACD reverses direction

The Fishing Line Strategy

The Fishing Line strategy uses technical indicators, namely, the Bollinger Bands. Usually, a 2nd failed attempt to break out of one of the bands will be limited to no more than 2 candles, in this case both which close below the lower (above the upper for a sell) band. The moment the asset crosses into the upper band (lower, ibid), we open a long position, placing out Take Profit at the top of the upper band and our SL at the bottom wick of the previous breakout candles.

The Fractals Strategy

The use of 2 or more indicators will always be fraught with tension; however, confirmation is important.

Here, we open the rather esoteric Bill Williams Fractal and Alligator Indicators. The fractals indicator indicates sets of 5-candle-long repeating patterns while the alligator superimposes 3 time-shifted moving averages along the chart.

Where the 3 MAs cross over each other alongside a fractal that’s narrower than the preceding fractal we can open a position at resistance, placing our SL at support.